How to get development exit finance as your building project nears completion
When a property development project is coming towards the end of its agreed term of finance, unexpected delays in finishing the build, or finalising sales, can have a major impact on the cost of your finance and the profitability of your development.
Exit finance wins on three counts: it’s going to be cheaper, it starts the clock again on your exit date, and it gives you the capital to get your next project underway.
Adam Arnott, Associate Director, Clifton Private Finance
Development finance is expensive – reflecting the level of risk carried by lenders, particularly at the early groundworks stage of the build. But risk decreases as the build progresses, and by the time a project is heading into the final marketing stage, the uplift in value of the completed works could gain you significantly cheaper borrowing if you refinance to reflect the lower LTV.
The cost of unexpected delays to a development project
There are several ways project overruns can start costing you significant amounts of money:
- Higher interest rates: The longer it takes you to repay lending at the relatively high interest rates of development funding, the greater the cost of your borrowing. When a project is nearing practical completion you can leverage the improved LTV to refinance at a lower rate .
- Servicing interest monthly: With a development finance contract that rolls up interest for payment at the end of the loan term, you have maximised your cash flow to pay ongoing build costs. But if you overrun the original loan term, you may be required to pay the interest accrued so far, and to start paying monthly interest until the lending is repaid.
- Extension fees: Many lenders will charge significant fees to extend the terms of your original loan. It’s often cheaper simply to refinance.
How development exit finance works
- Development exit finance is effectively a type of bridging loan, offering flexible short-term borrowing which can be accessed quickly.
- It allows you to pay off your existing development finance and use borrowing with lower interest rate, and also avoid expensive extension fees.
- Development exit finance is usually offered for between 1 and 18 months and there are typically no early repayment charges.
- Finance can usually be arranged in as little as 5-7 working days, making this the most suitable financial product if unexpected delays mean you need to arrange refinance quickly.
- You usually have the option to roll up interest or service it monthly.
- If there is still work outstanding on the project, you may be able to choose a flexible drawdown facility, allowing you to only take the capital as and when you need it (keeping your costs down as you’ll only pay interest on the money you access).
- If the development consists of multiple lots, you may have the option to retain a portion of the sale price of each lot, instead of having to wait to take your profit from the final lot. Or you can choose to apply the sales incomes towards repaying your exit finance.
The 3 compelling reasons for accessing exit finance
1 Exit finance is cheaper
- Typical development finance rates can range from 7-11%, depending on the size of loan and level of lender risk.
- Exit finance rates can start around 5%, which translates to substantial savings on the cost of borrowing.
- Interest on exit finance is retained, allowing you to apply all your available capital to completing the build.
2 Exit finance extends your borrowing term
Developers using regulated finance, secured against the value of a residential property, have the term of their finance limited to 12 months, which is a tight timetable for building works plus completing on sales, if that is the agreed exit.
Exit finance provides a much-needed breathing space, which can allow final-finishing and the marketing programme to proceed in an orderly way so that the property can achieve its optimum price.
3 Exit finance releases funding to get the next project underway
Medium-scale developers typically take their profit from the last units to be sold on a development: a timescale that militates against getting the next development underway.
The most cost-efficient developers are able to have site acquisition, design and planning in progress on their next scheme while building is finalised on their previous project, ready to commence groundworks when their major contractors are available.
How much can you access in exit finance?
If you own the property or land outright (unencumbered) your application is much stronger and you should be able to access 100% of the development costs.
When do you need to start looking for exit finance?
Realistically, at least three months before your development finance exit deadline, to give us time to investigate lenders who will suit your circumstances and have finance available for draw-down in time. As opposed to approaching the only lender who will consider your application.
Lenders will usually only consider providing exit finance for projects at practical completion stage. We have been able to arrange lending for developers who aren’t yet at handover: if this is your situation, give us a ring and we can discuss what we might be able to do for you.
Find affordable development exit finance
Clifton Private Finance has a team of specialist brokers who can help you find the best deals on development exit finance from across the whole market.
With established contacts with all the leading lenders, we can help you find the best interest rates and fees currently available.
Call us for immediate advice: